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Risk currencies mildly firmer following China's data

We saw some disjointed moves in the FX space on Friday with no clear theme driving the major FX pairs.

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There were some headlines out of the US and Europe which caused some volatility but ultimately FX pairs stabilised towards the end of US trade. Fed member James Bullard was on the wires with some dovish comments opposing dialling down stimulus due to the threat of disinflation. He would like to see inflation tick higher towards 2%. However, over in Europe France was downgraded to AA+ outlook stable (from AAA) by Fitch, merely bringing its rating in line with Moody’s and S&P. Portugal also remained in focus as the political situation remained tense and yields pushed higher.

AUD/USD dropped significantly and even ventured a touch below $0.90 in European trade. The pair printed a low of 0.899 before managing to bounce back to around $0.908 and was back in focus today ahead of China data. A raft of China economic releases hit the wires today with the headline being a mildly weaker than expected GDP reading of 7.6% (versus 7.7% consensus) while the annual run rate was in line with consensus at 7.5%.

Industrial production was a touch below expectations while retail sales smashed expectations (13.3% vs 12.9%). We saw quite a muted reaction to the data in the risk space as the market continues to struggle to interpret China’s economic data. AUD/USD found some buyers and is now trading at 0.91 but we still feel moves towards 0.92 will be greeted by selling. Tomorrow we get the RBA’s monetary policy meeting minutes and these are likely to be yet another source of volatility.

Meanwhile, EUR/USD managed to find support at $1.30 but remains contained by the $1.31 level. We feel the single currency might be a source of volatility for markets this week once the novelty of the recently dovish Fed comments wears off. USD/JPY is just holding onto ¥99 with Japan closed today for the Marine Day holiday.

After the sharp selloff in the US dollar last week, we feel this week might see a bit of a recovery, and caution should be exercised ahead of Fed chief Ben Bernanke’s testimony. Bernanke testifies before the House Financial Services Committee on Wednesday and the Senate Banking Committee on Thursday. We also have key readings for housing, manufacturing and inflation out of the US to look out for.

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